Portfolio CHECK-UP

Name: Thomas O'Brien, MD

Residence: Texas

Age: 49

Family: Married; one child

Years in practice: 8

Specialty: Plastic surgery

Annual income: $380,000

Savings: None specified

Financial concern: Dr. O'Brien is in the process of adopting a 401(k) newcomparability pension and profit sharing plan for his practice for 2004. Since hispractice is small and he only employs two other people, who are young andwhose aggregate salaries are under $60,000, it will cost his practice approximately$43,000 annually to fund such a plan, of which $41,000 will be applied to his benefit.Such a plan makes good economic sense, provides a long-term savings planfor the participants' and his retirements, and is protected from creditors.

However, in what type of investment vehicles should the monies that areannually contributed to the plan be placed? Should he consider using lifeinsurance and annuity contracts, a group annuity contract offered by an insurancecarrier, individual stocks and bonds, or mutual funds?

The Finance Professor's Solution

First, by process of elimination, he should consider what not to do. Since bothannuities and life insurance contracts are in and of themselves tax-deferred vehicles,he should not place a tax-sheltered vehicle within a tax-sheltered vehicle.Depending on the companies being considered, the added annual costs incurredthrough annuity and life insurance contracts can be considerable.

Many insurance companies offer group annuity products, which utilizemutual funds or clones of mutual funds as the underlying investment options.However, there are usually additional charges incurred over and above themoney managers' fund expenses.

Also, I would be inclined not to fund such a plan or allow the plan participantsto self-direct their accounts into individual stocks and/or bonds. This canpose further problems from a liability perspective, jeopardizing the plan.

Therefore, if Dr. O'Brien is seeking to minimize the expenses of his plan andmitigate risk, he may want to consider utilizing mutual funds as the investmentoption, making sure that the provider or fund company he choosesoffers an array of mutual fund options that allow for adequate diversificationamong large, mid, and small cap; value, growth, international, and emergingmarkets; and fixed-income investment fund options.

For more information, call Mr. Kosky at 800-953-5508or visit www.assetplanning.net.

Thomas R. Kosky and his partner, Harris L. Kerker, are principals of the AssetPlanning Group in Miami, Fla, specializing in investment, retirement, and estateplanning. Mr. Kosky teaches corporate finance in the Saturday Executive andHealth Care Executive MBA Programs at the University of Miami.